Further increases in transaction prices for the start of the fourth quarter of this year, particularly in flat rolled products, show that the upward trend in European steel values has not yet run out of steam.

Further increases in transaction prices for the start of the fourth quarter of this year, particularly in flat rolled products, show that the upward trend in European steel values has not yet run out of steam.

This appears to have come as a surprise to steel producers. Before the summer holidays they were expressing caution about future price increases. They were saying there might be only ‘limited room’ for further adjustments – a coded warning that the crest of the current boom might be arriving.

The peak now seems to have been extended into next year. This is good news for the mills as they embark on price negotiations with annual contract customers. Trying to persuade them to pay around 20%t more for their steel in 2005 would have been a difficult task in a falling market.

However, as prices are continuing to move up, some major annual contract sectors seem to have accepted the need for a sizeable price advance. Packaging manufacturers, for example, are now talking less about resisting steel price rises and more about how they can pass on the increase to their own customers.
A 20% price escalation is comparatively modest compared to the rise that has taken place in steel market prices in the last twelve months. This may indicate that the mills are factoring in to their calculations a decrease in general prices at some stage during 2005. It may also indicate that the steelmakers have been told in no uncertain terms that users will switch to alternative materials if steel becomes too costly or transfer their manufacturing units offshore.

Nevertheless, steel producers appear to have had little difficulty in passing through price increases for the fourth quarter. With a few exceptions, such as weak construction activity in Germany, European steel demand on the mills is still strong.
Suppliers are indicating that they will be looking for further rises for period one deliveries, especially for flat rolled products. Part of the justification for this is higher costs for raw materials and other inputs. For iron ore, most of the predictions are that prices will rise in 2005 by at least the same amount as they did in 2004. In coking coal, where supply is extremely tight, it would not be surprising to see annual contract prices almost double to more than $US100 per tonne fob for leading brands of Australian and Canadian coal.

Energy costs will also go up next year if the oil price remains in the region of $US50 per barrel. In a further indication of continually expanding values, the prices of slabs for export from Brazil are reported at over $US500 per tonne fob for the first trimester, 2005 (up from about $US300 a year ago).
For European mills, these cost increases are mitigated by the weakness of the dollar. And, so far this year, they have succeeded mightily in passing on the higher costs to non-contract customers. So much so that steel company profits – far from being squeezed by higher costs – are booming. Mills have been issuing what might be termed 'profit warnings in reverse' as their earnings outpace investors’ expectations.

The mills continue to operate with full order books. Many flat rolled producers are sold out for the final quarter. The stock overhang has not yet reached the point at which it is affecting market sentiment. If EU mills’ deliveries continue to exceed the level of actual consumption, this could soon change.